Selling Your Note (3)

Archive for the 'Selling Your Note' Category

Recovery Hinges on Lending… The Economy Needs Owner’s to Provide Seller Financing

December 22nd, 2010 categories: Real Estate News, Seller Financing, Selling Your Note

Clients_young couple Economist Kenneth Rosen says “Money is easy, but credit is tight– many would-be home buyers have discovered during the downturn that while loans may be dirt cheap, but they’re hard to come by.

Rosen, the chairman of the University of California, Berkeley, Fisher Center for Real Estate and Urban Economics, said he doubts the Federal Reserve’s efforts to keep long-term rates low can stimulate the kind of growth Fed Chairman Ben Bernanke and his colleagues are hoping for.

Speaking of Bernanke (and this is totally a random side note, but it was so funny and poignant at the same time)… watch this video about “Quantitative Easing” and “the Bernanke” if you’ve got 7 minutes to spare:

[youtube]http://www.youtube.com/watch?v=PTUY16CkS-k[/youtube]

Anyhow, with bank loans tough to come by, owner financing strategies are increasingly needed to keep the real estate market liquid… we need buyers and sellers to keep coming together in mutually beneficial ways, even when “the system” isn’t working very well.

But we can’t afford to be sloppy. Creative deal structuring still needs to be legal, ethical and intelligent, and give all parties a reasonable exit strategy that preserves both real and paper assets. And if you’re a real estate professional involved in an owner financed transaction, then you really need to know how to advise your clients accurately to avoid liability your broker probably wouldn’t be happy with!

I’ll never forget one seller who brought a seller carry back note to me hoping I would buy it.

Unfortunately…

the way the transaction was engineered,
the lack of documentation, and
outright errors in the calculation of the numbers in the note

made the note impossible for me to buy.

When I told him that I probably would have been able to buy at least part of the note if I’d been involved in the underwriting, he nearly exploded with exasperation:

“I asked my agent if he knew anyone that could help us put the note together, and he said ‘no’!”

If you’re a real estate professional that has used seller financing to sell a client’s property, did you also tell them that they could sell their note? If not, they could come back to you screaming :-/

Spoken by Dawn Rickabaugh | Discussion: No Comments »

Loan Modification Decreases Value of Note by $30,000

December 8th, 2010 categories: Selling Your Note, The Note Business

[youtube]http://www.youtube.com/watch?v=5jT26JVEjCA[/youtube]

[Watch video on site]

When he was shocked at the discount, this is what I wrote to the note holder:

I’ve attached a partial for you to consider, which would greatly minimize your discount and still allow you to take advantage of more attractive investment opportunities that are in front of you:

$75,474 for 120 payments

$125, 023 approximate balance when you get the note back plus interest (166 payments @ $1,126.92 = $187,068.72)

Total value: $200,497 (for your $167,395 note balance)

You can see that you are getting $75,474, and the note balance is only dropping by $42,372!

If there is an early pay off, you will not lose the tail end of your note, it is still there for you.

It can be hard to understand why discounts (especially on the full purchase offer) seem so high, but think about it this way…

How much did a loaf of bread cost 24 years ago? And by comparison, how much will it cost 24 years from now? Because of inflation (which is expected to increase because of all the money we’re printing) a dollar 24 years from now will probably only buy a dime’s worth of goods, if we’re lucky.

If I offered you $100 in 24 years, or $50 today, which would you take? Only accounting for 7% average inflation, that $100 in 24 years is only worth $18.95 in today’s dollars, so you’re actually getting more buying power by taking half the amount now.

If you have no way of making more than 6.25% on your money, then there is no reason to sell and take a discount, unless you need money for something important, or you just don’t want the worry of what might happen if the economy really does some crazy things down the road and your payors run into hard times, or commercial property values drop even further.

If you have a way to make more than 6.25% on your money, then you will be ahead of the game even taking a discount on the note now. There are some astounding investment opportunities right now… even average conservative investors are easily making 10-12% on their money.

If you take the $75,474 and invest it at 12% for the next 10 years, letting the money compound, you will have $249,093, which obviously more than makes up for any discount right now.

So in 10 years, you could have:

$249,093 (from investing at 12% or better)

$125, 023 (approximate balance when you get the note back)

Total value: $374,116

When you look at things in this way, and you account for the time value of money, inflation, and the cost of lost opportunity to make stronger investments, you can see that you are actually losing money for your family long term by being unwilling to take a discount on a 6.25% note when you could invest your money easily at 10-12% or better.